Turks Get the Do-Not-Borrow MemoConstantine Courcoulas
Seven months after Turkey’s central bank lifted interest rates at an emergency late-night meeting, it’s become clear that free-spending consumers have gotten the message: Loan growth is plunging.
Consumer loans increased at the slowest pace since December 2012 in the 12 months through Aug. 1, rising 14.2 percent, according to data from the central bank. That’s down from a pace of 27 percent at the end of 2013, weeks before before policy makers more than doubled the benchmark rate to 10 percent to help stem a rout in the lira.
The move worked, with the lira and Turkish bonds posting the biggest gains in emerging Europe since the January meeting, in part because the lending slowdown is curtailing imports and helping rein in the current-account deficit. It was that gap, which is the largest among major developing nations when compared with economic output, that helped earn Turkey a spot in Morgan Stanley’s so-called Fragile Five group of nations that are most vulnerable to rising rates in developed economies.
“Turkish regulators have finally hit the mark,” Cagdas Dogan, a banking analyst at BGC Partners Inc. in Istanbul, said by phone on Aug. 27. “The government has a clear idea that loan growth leads to a current-account deficit and they want to curb it. So all of those factors together come to this.”
The lira strengthened 4.2 percent since the January rate increase to 2.1617 per dollar at 5:43 p.m in London, stemming a 21 percent plunge over the prior 12 months that was the worst in emerging markets after the Argentine peso. Inflation has showed signs of slowing as the lira rebounded, with the annual rate falling to 9.32 percent in July after reaching a two-year high of 9.66 percent in May.
In addition to raising rates, policy makers implemented tougher loan restrictions this year to curb credit growth. Retail lending among Turkey’s 81 million people had almost doubled in the three years through 2013, before the Banking Regulation and Supervision Agency capped maturities on credit card, general purpose and auto loans and set limits on the goods people can buy with credit-card installments.
Households boosted savings by 7.5 percent to 730 billion liras ($337 billion) between September to March, according to data from the central bank. The average interest rate on consumer loans jumped to a 20-month high 15.99 percent in March, the data show, helping to stem annual loan growth that approached 30 percent last year.
“Overheating does not help banks in the long run,” Fatih Tugrul Topac, an Istanbul-based banking analyst at TEB Investment, said by phone on Aug. 27. “Turkish banks now have been in a more sustainable path in terms of lending growth.”
The yield on the September 2022 dollar-denominated bonds of Turkiye Garanti Bankasi AS, the country’s biggest lender by market value, has fallen 190 basis points this year to 5.14 percent today. That compares with a 40 basis-point decline to 4.78 percent yesterday for the Bloomberg USD Emerging Market Composite Bond Financials index.
The nation’s current-account shortfall dropped 35 percent year on year in the first half to $24 billion, official data show. The country has the widest deficit among 21 developing nations tracked by Bloomberg.
Even after the retreat, retail-loan growth in Turkey exceeds that of peers in emerging Europe and Africa. Credit to South African households rose 4.3 percent in the year to June 30, while Polish consumer credit grew 5.2 percent in the period, according to data of their respective central banks.
Turkey’s government may be inclined to relax some lending restrictions as it prepares for general elections next year, according to Sadrettin Bagci, an analyst at Deniz Investment Menkul Degerler AS in Istanbul.
Recep Tayyip Erdogan, sworn in as Turkey’s president yesterday after more than 11 years as prime minister, has called on the central bank to cut its main rate to 4.50 percent, where it stood at the start of the year, to spur the economy. Policy makers kept the key rate on hold this week after reducing it three times starting in May to bring it to 8.25 percent. The average consumer-loan interest rate fell to 13.5 percent on Aug. 22.
“Consumers have been postponing splurging on any big-ticket items as they wait for rates to bottom out after their January highs,” according to Dogan at BGC Partners. Since approaching the central bank’s 15 percent target, loan growth has “stopped declining or even started to pick up,” he said.